How much can I contribute to my IRA?

Opening an individual retirement account (IRA) is a great way to save for a comfortable retirement and will probably save you many financial headaches in the long run. But your IRA won’t fund itself, so follow this practical guide to ensure your years in retirement are not all about making ends meet. 
 

How much can I contribute to my IRA?
How to fund your IRA?

There are two main types of IRAs and the contribution limits are the same for both. However, the tax implications are different so it’s best to know your IRA options before you decide which one is more suitable for you. 

In a traditional IRA, your contributions may be tax deductible and you get to defer paying taxes on those funds until you withdraw them in retirement. Roth IRA contributions are not tax deductible and you pay taxes on the money upfront. Since you won't be paying taxes on the money when you withdraw it, it’s sensible to set up a Roth IRA if you expect to be in a lower tax bracket when you retire.

The Internal Revenue Service (IRS) sets contribution limits for IRA account holders and revises these thresholds every year. The contribution limit is increased periodically by the IRS to keep up with inflation. For 2021, the standard contribution limit for both traditional and Roth IRAs is $6,000 per year per person. If you’re 50 or older, the IRS allows you to contribute an extra $1,000 each year for a total of $7,000. Although this may not seem a lot, the tax breaks provided by the IRS will have a dramatic impact over time. Note that if you’re rolling over another retirement plan into an IRA, annual contribution caps don’t apply.

How much can I contribute to my IRA?
IRA contribution rules

You can only contribute earned income to an IRA. In other words, Social Security payments, pension payouts dividends and other types of income don't count. As a general rule, you can’t contribute more than what you earn. If you make $5,000 in taxable income in a given tax year, your IRA contribution limit will be $5,000.

Bear in mind that the annual limits are per person, not per type of account. In other words, you can't contribute $6,000 to a traditional IRA and $6,000 to a Roth IRA in the same tax year. You can, however, split your maximum contribution amount between a Roth IRA and a traditional IRA.

You can start transferring funds to either type of IRA as early as January 1 or as late as the tax year’s filing deadline in mid-April each year. You get to decide whether you make a lump-sum payment or set up periodic contributions throughout the year. 

You can contribute to a Roth IRA at any age. Starting from 2020, you are allowed to add money to a traditional IRA past the age of 70 ½ as the Setting Every Community Up for Retirement Enhancement (SECURE) Act abolished the previous age limit for contributions to traditional IRAs.

How much can I contribute to my IRA?
Roth IRA contribution limits

Roth IRA contributions may be limited if your modified adjusted gross income (MAGI) is over a certain threshold. The amount you can contribute is reduced — and eventually eliminated — at higher incomes.

Roth IRA income limits in 2020 and 2021
Filing status 2020 MAGI 2021 MAGI Maximum annual contribution
Single, head of household or married filing separately (if you didn't live with spouse during year) Less than $124,000 Less than $125,000 $6,000 ($7,000 if 50 or older)
Between $124,000 and $139,000 Between $125,000 and $140,000 Reduced contribution
$139,000 or more $140,000 or more No contribution allowed
Married filing jointly or qualifying widow(er) Less than $196,000 Less than $198,000 $6,000 ($7,000 if 50 or older)
Between $196,000 and $206,000 Between $198,000 and $208,000 Reduced contribution
$206,000 or more $208,000 or more No contribution allowed
Married filing separately (if you lived with spouse at any time during year) Less than $10,000 Less than $10,000 Reduced contribution
$10,000 or more $10,000 or more No contribution allowed

 

How much can I contribute to my IRA?
Deduction limits for traditional IRAs

Traditional IRAs come with their own set of restrictions. Depending on the size of your paycheck and whether you and your spouse have a retirement plan at work, the IRS will allow you to deduct all or a portion of your traditional IRA contributions.

Traditional IRA deduction limits in 2020 and 2021
Filing status 2020 MAGI 2020 MAGI Deduction
Single or head of household (and covered by a retirement plan at work) Less than $65,000 Less than $66,000 Full deduction
Between $65,000 and $75,000 Between $66,000 and $76,000 Partial deduction
More than $75,000 More than $76,000 No deduction
Married filing jointly or qualified widow(er) Less than $104,000 Less than $105,000 Full deduction
Between $104,000 and $124,000 Between $105,000 and $125,000 Partial deduction
More than $124,000 More than $125,000 No deduction
Married filing separately

Less than $10,000

Less than $10,000

Partial deduction
More than $10,000 More than $10,000 No deduction

 

How much can I contribute to my IRA?
SEP and SIMPLE IRA contribution limits

If you are a self-employed individual, a freelancer, contractor or a small business owner, you may want to open a SEP or SIMPLE IRA.

The simplified employee pension, or SEP IRA, is used by business owners – including independent contractors and freelancers – to provide retirement savings for themselves and their employees. Contributions to SEP IRAs are generally tax-deductible for the business. The contribution limits for SEP IRAs are significantly more generous than the traditional or Roth variants. The maximum contribution in 2021 cannot exceed the lesser of $58,000 (up from $57,000 in 2020) or 25% of employees' eligible compensation.

For your own contribution as a business owner, the cap is 20% of your net earnings from self-employment, as determined under the SEP IRA rules. Employees are not allowed to make salary deferral contributions to a SEP IRA, only the employer can make contributions. If you as a business owner set up SEP IRAs for your employees, you will be required to contribute the same amount as you pay into your own account but you will be able deduct the contributions.

For SIMPLE IRAs, the annual contribution limit is $13,500, the same amount as in 2020. Employees aged 50 or older can make additional catch-up contributions of $3,000, for a total of $16,500. An employer can choose to either make a dollar-for-dollar match of up to 3% of an employee’s pay or contribute a flat 2% of compensation, whether the employee contributes or not.
 

Author of this article

Edith Balázs

Author of this article

Having spent the better part of the past two decades as a financial journalist at international media outlets, Edith enjoys researching complex topics and stripping them of the unnecessary clutter to arrive at clear and easy-to-understand copy.

Edith Balázs

Senior Editor

Having spent the better part of the past two decades as a financial journalist at international media outlets, Edith enjoys researching complex topics and stripping them of the unnecessary clutter to arrive at clear and easy-to-understand copy.

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